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131 Cards in this Set

  • Front
  • Back
What is a Trust?
A trust is:
a fiduciary relationship
with respect to specific property (res)
wherein the trustee holds legal title to the property
subject to enforceable equitable rights of the beneficiary

~ The creator of the trust, the settlor, must have had the intent to create the trust.
~ The trust must have a valid trust purpose.
~ No consideration is required.
What are the Characteristics of an Express Trust?
1. Intention to Create a Trust
2. Trustee
3. Trust Property
4. Beneficiaries
5. Trust Purposes
How may the Settlor's Intent to create a trust be manifested?
The settlor’s intention to create a trust is essential to existence of an express trust.
~ Intent may be manifested by written or spoken words or by the conduct of the settlor—unless the Statute of Wills or the Statute of Frauds applies.
~ An oral trust of personal property is valid.
~ Communication of intent to the beneficiaries is not necessary;
~ delivery of the deed to the trustee is sufficient—unless the settlor is also the trustee, in which case he must segregate trust assets or otherwise show trust intent.
When Must Be a Settlor's Intent to create a present trust be Manifested?
An intention to create a present trust must have been externally manifested by the settlor at the time he owned property and prior to its conveyance to another.
(However, the conduct of the parties subsequent to the conveyance may be evidence of an earlier intent.)

1) The Settlor Must Intend Trust to Take Effect Immediately:
The settlor’s intent must be that the trust take effect immediately, not at some future time - although a future interest can be trust property.
What are Precatory Expressions?
A settlor’s expression of a hope, wish, or mere suggestion that the property be used in a certain way is called precatory language. The usual inference is that precatory expressions do not create a trust. This inference can be overcome by:

1) Definite and precise directions;
2) Directions addressed to a fiduciary (e.g., executor under a will);
3) A resulting “unnatural” disposition of property (e.g., close relative will otherwise take nothing) if no trust imposed; or
4) Extrinsic evidence showing the settlor previously supported the intended beneficiary.
What if the Trustee dies?
Once established, a trust will not fail because the trustee dies, refuses to accept appointment, or resigns.
~ The court will appoint a successor trustee unless it is clear that the settlor intended the trust to continue only so long as a particular trustee served.
~ The absence of a trustee may cause an attempted inter vivos trust to fail for lack of delivery.
What is a passive trust?
A Trustee Must Have Duties:
A “passive trust” (where trustee has no duties) is void, and the beneficiaries take legal title.
~ In many jurisdictions, the duty to convey title to the beneficiaries is enough to make the trust active.
What are the Qualifications of a Trustee?
Anyone who has capacity to acquire and hold property for his own benefit and has capacity to administer the trust may be a trustee. (Minors and insane persons can hold property, but cannot administer.)
~ State statutes limit the right of some persons or corporations to serve as trustee (e.g., foreign corporations).
How can a trustee be removed?
A court can remove a trustee or refuse to confirm an appointment.

1) Grounds for Removal:
Grounds for removal include: serious breach of trust, old age, habitual drunkenness, conflict of interest, etc.
~ The basic factor considered is whether continuation in office would be detrimental to the trust.
~ If the settlor knew of the grounds for removal at the time he created the trust, the court may choose not to remove the trustee.

2) Beneficiaries Must Have Grounds to Remove
Absent grounds, beneficiaries cannot remove the trustee unless the power is specifically granted to them by the trust instrument.
What result with a Disclaimer or Resignation by a Trustee?
Before acceptance, a trustee can disclaim or refuse appointment for any reason.
~ However, a trustee cannot accept a trust in part and disclaim it in part.
When is a testamentary trust treated as in existence of?
A testamentary trust is treated as in existence as of the settlor’s death, and the trustee’s acceptance “relates back” to that date.
~ It is thus possible for a trustee, by accepting, to become personally liable on tort claims arising prior to the time he accepted.
After acceptance, when can a Trustee resign?
Once an appointment has been accepted, the trustee cannot resign without court permission, unless all beneficiaries consent or the trust provides otherwise.
What happens Where Sole Trustee Is Also the Sole Beneficiary?
If the sole trustee and sole beneficiary are the same individual and hold precisely the same interests, titles merge and the trust terminates.
What happens when there is no trust property?
No Res—No Trust.
Where there is no trust property, the trust fails because the trustee has no property to manage.
May a Future Interest be held in trust?
A future interest may be held in trust, but an interest not yet in legal existence (i.e., a mere expectancy) cannot be held in trust.
~ Future profits from an existing contract can be a trust res.
Can Property that the Settlor Has Power to Convey Be Subject of a Trust?
Yes. The trust res must be existing property that the settlor has the power to convey, including intangibles (e.g., promissory notes) in which the settlor has an assignable interest.
Does the Trust Res have to Be Segregated from Other Property?
Yes. The res must be identifiable and segregated, but the res may be a fractional or undivided interest in specific property.
Can a Debtor Hold His Own Debt in Trust?
A debtor cannot hold his own debt in trust, but the debtor can declare himself trustee of particular property from which the debt is to be paid; and the debt can be held in trust by another person.

~ An unenforceable gratuitous promise cannot be the subject of a trust.
What is the role of the Beneficiaries in terms of the characteristics of a trust?
A trust cannot exist without someone to enforce it. Thus, a beneficiary is necessary to the validity of every trust except charitable and honorary trusts. If a trust fails for lack of a beneficiary, a resulting trust in favor of the settlor or his successors is presumed.
Who can be a Beneficiary of a Private Trust?
Capacity:
Any person, natural or artificial, capable of taking and holding title to property can be a beneficiary of a private trust.
What are Incidental and Indirect Beneficiaries?
Not everyone who benefits from a trust is considered to be a beneficiary. The trust must operate directly to benefit the person (e.g., attorney designated by trust instrument is not beneficiary).
Is Notice to and Acceptance by a Beneficiary necessary to the validity of a trust?
Notice to a beneficiary is not essential to the validity of a trust. Lack of such notice may indicate, however, that no trust was intended. Acceptance by the beneficiary is required, but can take place after a valid trust is created. Acceptance may be express or implied and is generally presumed. However, the trust will not be forced on a beneficiary, and he may within a reasonable time renounce his rights thereunder.
Must there be Definite Beneficiaries Under a Private Trust?
Yes. There must be definite beneficiaries in order to have a private trust (not required in charitable trusts).
May there be Unascertained Beneficiaries under a Private Trust?
Beneficiaries may be “definite” even though not yet ascertained (e.g., unborn beneficiaries).
~ Beneficiaries must be ascertainable by the time their interests are to come into enjoyment.
~ Acts of independent legal significance and incorporation by reference may be relied upon to ascertain beneficiaries.
What is the rule as to when a private trust exists for the benefit of a class?
If a private trust exists for the benefit of a class, the class must be reasonably definite.
~ As long as the class is reasonably definite, the trust may authorize the trustee to exercise his discretion in selecting members to be benefited, or may provide that only those who meet certain requirements will benefit.
~ Broad power to choose beneficiaries, however, may constitute a gift or a power of appointment rather than a trust.
When is a Trust Purpose Invalid?
A trust purpose is invalid if:
(i) it is illegal,
(ii) its performance requires a criminal or tortious act, or
(iii) it is otherwise contrary to public policy (e.g., encourages immorality).
What happens if a condition attached to an interest is against public policy?
If a condition attached to an interest is against public policy:
a. The settlor’s alternative desire controls if expressed.
b. If the illegal condition is a condition subsequent, the condition is invalidated but the trust is valid.
c. If the illegal condition is a condition precedent, the preferred view is to hold the interest valid unless there is evidence that the senior’s wish would be to void the beneficiaries’ interest altogether if the condition is unenforceable.
How are Express Trusts Created, what are the types of Express Trusts?
A trust can be created by inter vivos transfer, by an inter vivos declaration of trust, or by will (testamentary trust).
What is required for an Inter Vivos Trust (Living Trust)?
A Present Declaration or Transfer of Trust Required.
A trust can be created either by a person declaring himself trustee for another or by the transfer of property to another as trustee.
~ The present intent required must be manifested by conduct (delivery) or words (declaring oneself trustee).
~ Delivery means placing the trust property out of the settlor’s control (unless the settlor serves as trustee).
With the creation of an Inter Vivos Trust, how is the present intent that is required manifested?
The present intent required must be manifested by conduct (delivery) or words (declaring oneself trustee).
What does Delivery mean?
Delivery means placing the trust property out of the settlor’s control (unless the settlor serves as trustee).
What If a present trust is not established because there is no trust res?
If a present trust is not established because there is no trust res, the trust arises when the settlor subsequently acquires the res and remanifests trust intent.
What is the Statute of Frauds requirement for an Inter Vivos Trust?
A Writing is Required for Trusts of Land.
Most states do not require a writing for a trust of personal property.
For a trust of land, however, a written instrument signed by the person entitled to impress the trust upon the property is commonly required under the Statute of Frauds.
~ Note that an otherwise invalid oral trust of land may be enforced by imposing a constructive trust;
e.g., A conveys land to B on oral trust for A or C.
With an Inter Vivos Trust, Is Parol Evidence allowed?
Yes. Most states allow extrinsic evidence where an ambiguity appears on the face of the writing.
What are the Formalities for a Testamentary Trust?
Trust intent and the essential terms of the trust (trust res, beneficiaries, and trust purpose) must be ascertained from the will itself, from a writing incorporated by reference into the will, from facts having independent legal significance, or from the exercise of power of appointment created by the will.
What is a Secret Trust, what result when one is found?
Where a will makes a gift that is absolute on its face, but was in fact made in reliance on the beneficiary’s promise to hold the property in trust for another, the intended trust beneficiary may present extrinsic evidence of the promise.
~ If the promise can be proven by clear and convincing evidence, a constructive trust (will be imposed on the property in favor of the intended trust beneficiary.

~ A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference .
What is a Constructive Trust?
A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference .
What is a Semi-Secret Trust?
In a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary.
~ The gift fails, and the named trustee holds the property on resulting trust for the testator’s heirs. (Extrinsic evidence not allowed).
What is the result when a Semi-Secret Trust is found?
In this instance, a Resulting Trust arises. If a trust fails to name the beneficiary, the gift fails, and the named trustee holds the property on resulting trust for the testator’s heirs. ~ Note that Extrinsic evidence is not allowed.
How do the Rules Governing Charitable Trusts differ from those applicable to Private Trusts?
The rules governing charitable trusts differ from those applicable to private trusts in three important ways: a charitable trust must have a charitable purpose, indefinite beneficiaries, it may be perpetual, and the cy pres doctrine applies.
What is the Trust Must be for Charitable Purposes Requirement?
A charitable trust must have a purpose considered to benefit the public.
~ Charitable purposes include the relief of poverty, the advancement of education or religion, the promotion of health, and the accomplishment of governmental purposes such as parks and museums.
~ The class to be benefited may be limited, but may not be so narrow as to only benefit a few individuals whom the settlor wishes to aid personally.
What is the rule re Beneficiaries relating to a charitable trust?
The courts consider the community at large to be the beneficiary of a charitable trust, and a particular individual eligible for its benefits has no standing to enforce its terms.
~ The duty of enforcement is placed upon the state attorney general.
Does the RAP apply to Charitable Trusts?
A charitable trust may be perpetual.
~ Also, the Rule Against Perpetuities does not apply to the shifting of the beneficial interest in a trust from one charity to another on the happening of a condition.
~ The Rule does apply, however, to shifts between private and charitable uses.
What is the Cy Pres Doctrine?
When a charitable purpose selected by the senior is impractical, the court will select an alternative under the doctrine of cy pres, which means “as near as possible.”
~ The court must find a general charitable intent on the part of the settlor and ascertain her primary purpose.
What are Honorary Trusts?
Honorary trusts are commonly established for the benefit of pets or for the maintenance of burial places.
~ Because there is no human beneficiary to enforce an honorary trust, the trustee is “on her honor” to carry out its terms.
~ Courts uphold honorary trusts as long as the named trustee is willing to perform her duties; failing this, a resulting trust is imposed.
~ Absent special statutes, most jurisdictions will void an honorary trust on the basis of the Rule Against Perpetuities if its duration may be more than a (human) life in being plus 21 years.

~ To avoid the perpetuities problem, some courts use constructional outs to save the gift, such as by holding that: (i) the trust is personal to the named trustee; and/or (ii) since the fund will be exhausted within the perpetuities period, it cannot last beyond the period and does not violate the Rule.
What result if the named trustee is unwilling to perform her duties in an honorary trust?
a resulting trust is imposed if the named trustee is unwilling to perform her duties;

~ A resulting trust arises when an express trust fails; e.g. the beneficiary dies unbeknownst to the Settlor, in this case the trustee holds the property in resulting trust for the settlor; when an express trust does not use or exhaust all the trust property, a resulting trust arises.
What is a Purchase Money Trust?
A purchase money trust is another form of Resulting Trust.
E.g. A purchase money resulting trust arises when one person purchases and pays for property and the name of another person is on the title. For example, a person purchases a farm for $100,000 and directs the seller to make the deed out to a third person. Nothing further appears concerning the purchaser's intention, and no relationship exists between the purchaser and the third person. In this situation, a resulting trust is created. The purchaser's intention is inferred from the absence of expressed intention that she intends the third person to have an interest in the farm. This occurs because a person usually does not intend to dispose of property without receiving something in return for it, unless she makes an express statement to the contrary, such as announcing an intention to make a gift or loan. If the purchaser is the spouse or parent of the third person, which is not the case here, it is presumed that a gift is intended. In this case, the third person holds a purchase money resulting trust for the purchaser.

~ The resulting trust attempts to dispose of the property in the manner the person who transferred it would have wanted if he had anticipated the situation. The court will order that the person with legal title to the trust property hold it in a resulting trust for the person who transferred it. When a charitable trust—a trust designed for the benefit of a class or the public generally—fails, a resulting trust will be invoked only if the doctrine of Cy Pres is deemed not to apply. This doctrine implements the intention of a person as nearly as possible when giving the intent literal effect would be illegal or impossible.
What is the General Rule as to Alienability of a Beneficiary's interest?
Absent restrictions by statute or by the trust instrument, a beneficiary may freely transfer his interest in the trust.
~ The assigned interest remains subject to all previous conditions and limitations.
What is the General rule as to Involuntary Alienation of a Beneficiary's interest?
Absent restrictions by statute or by the trust instrument, an insolvent trust beneficiary’s creditors may levy on his beneficial interest.
~ The interest is subject to judicial sale. To avoid this, a court may order the trustee to pay the beneficiary’s income to the creditors until the debt is satisfied.
What are Spendthrift Trusts?
A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring his interest in the trust and his creditors are precluded from reaching it to satisfy their claims.
~ The purpose is to protect the beneficiary from his own improvidence.
~ Although a spendthrift trust is a restraint on alienation, most courts uphold spendthrift restrictions.
May a Creditor reach a Beneficiary's Interest in a Spendthrift Trust?
A beneficiary’s creditors cannot reach his interest until income has been paid to him.

~ A restriction permitting the beneficiary to voluntarily alienate his interest, but purporting to deny creditors the right to reach the beneficiary’s interest, is probably invalid.

~ Many states allow certain classes of creditors (dependents, furnishers of necessities) to reach a beneficiary’s assets notwithstanding a spendthrift restraint.
What if there is an Attempted Assignment in Violation of a Spendthrift Provision?
A beneficiary’s assignees cannot force the trustee to pay them (although the trustee can do so if the beneficiary has not repudiated the trustee’s authorization to pay assignees).
Is a spendthrift provision valid if the settlor is the sole beneficiary?
A spendthrift provision is invalid if the settlor is the beneficiary (the settlor cannot protect his own retained interests from his creditors).
What is a Discretionary Trust?
Where a trustee is given discretion whether to apply or withhold payments to the beneficiary, the beneficiary’s creditors or assignees have the same rights as the beneficiary.
~ They take only if the trustee exercises his discretion to pay, unless the beneficiary’s interest is also protected by a spendthrift restriction.
(But where the settlor is the discretionary beneficiary, his creditors can compel payments.)
~ A court will intervene where a trustee abuses his discretion.
What are Support Trusts?
A support trust directs the trustee to pay only so much of income or principal as is necessary for the beneficiary’s support.
~ The interest of the beneficiary cannot be assigned or reached by creditors.
~ It is a question of the settlor’s intent as to whether the beneficiary’s other resources should be considered in determining the amount payable to him out of the trust fund.
What is the General Rule as to the Settlor's power to revoke or amend?
The power to revoke generally also includes the power to amend.
~ In most states, the settlor may not revoke or amend a trust unless he expressly reserved that right.
What is the General Rule as to Modification of a Trust by the Beneficiaries?
Beneficiaries may compel modification or termination only when all consent, and the modification or termination will not frustrate any material trust purpose, such as protecting a beneficiary from lack of ability to manage property.
Is the Trustee liable if he assents to the wishes of the Beneficiaries and distributes trust assets?
No. Where all beneficiaries consent to termination, the trustee is not liable if he accommodates them by distributing the trust assets.
What is the Role of the Settlor in Terminating an Inter Vivos Trust?
As long as the beneficiaries have a right to terminate, the settlor’s objections are not a bar (but may be evidence as to whether termination would defeat trust purposes).
~ However, joinder of the settlor (in terminating) may be deemed a waiver of a material purpose that would otherwise block termination.
Does the Trustee have a Power to Terminate; When does a Trust Terminate?
A trustee has no power to terminate the trust except as provided in the trust instrument;
~ otherwise, the trust terminates only when the trust purpose is accomplished.
~ A power in a trustee to invade principal may be broad enough to effectively entitle him to terminate the trust.
What is the Court's Power to Terminate or Modify a Trust?
A court may prematurely terminate the trust where the trust’s purpose has become impossible or illegal or has been completed.
What is the Doctrine of Changed Circumstances?
A court may also, upon a change of circumstances unanticipated by the settlor, authorize a deviation from the administrative terms where necessary to achieve the trust purpose.
~ Such changes may not deprive the beneficiaries of their interests in the income or corpus;
~ however, where the primary purpose of the trust was to support the income beneficiary, recent statutes have given the court power to invade the corpus.
~ In addition, a court can accelerate vested rights.
What are the Sources of a Trustee's Powers?
A trustee has those powers expressly conferred by the trust instrument, state law, and court decree plus all powers implied as are necessary or appropriate to accomplish the trust purposes.
~ Powers normally attach to the office and pass to successor trustees, i.e., they are not personal.
What is the rule as to Joint Powers of Trustees?
Under the traditional view, joint trustees must exercise their power by unanimous agreement.
~ Today, in nearly half the states, any power vested in three or more trustees may be exercised by a majority of them.
What are Imperative and Discretionary Powers?
A power is “imperative” if the trust instrument requires its exercise.
~ “Discretionary” powers are ones that the trustee may or may not perform.
~ Both are subject to judicial review for abuse of discretion.
~ A trustee is not immune from review even if given “uncontrolled” discretion, and the court will intervene if the trustee fails to exercise any judgment at all.
What are Implied Powers?
Implied powers include such things as are necessary to operate the trust (e.g., power of sale, to invest, to meet expenses, to lease land).
~ Normally, a trustee has no implied power to borrow money, or to mortgage or otherwise encumber trust property.
Under Duties of the Trustee - What is the Standard of Care Required of a Trustee?
The trustee must exercise that degree of care, skill, and caution that would be exercised by a reasonably prudent person in managing her own property.
~ And, if the trustee has greater or special skill, she will be held to a higher standard.
What is the Trustee's Duty of Loyalty?
Absent court approval or express waiver in the trust instrument, a trustee cannot enter into any transaction in which she is dealing with the trust in her individual capacity.
~ A trustee owes a duty of undivided loyalty to the trust and its beneficiaries.

(i) A trustee cannot buy or sell trust assets even if the price is a fair one.
(ii) A trustee may not sell property of one trust to another trust of which she is also trustee.
(iii) A trustee may not borrow trust funds nor loan her personal funds to the trust, and any interest paid on such a loan must be returned to the trust.
(iv) A trustee cannot use trust assets to secure a personal loan.
(v) A trustee cannot personally gain through her position as trustee.
(vi) A corporate trustee cannot invest in its own stock as a trust investment. But it can retain its own stock if such stock was a part of the original trust res when the trust was established, provided that retention of the stock meets the prudent investor standard.
(vii) Self-employment can constitute a form of prohibited dealing. However, if the trustee renders extraordinary services to the trust, she may be entitled to additional compensation.

~ The duty of loyalty extends equally to all beneficiaries, unless the trust instrument specifies otherwise.
What is the Trustee's Duty to Account?
The duty to keep and render accounts ensures that the trustee is meeting his obligation of loyalty.
What are the Beneficiary’s Rights in Case of a Prohibited Transaction?
If a prohibited transaction takes place, the beneficiary may:
(i) set aside the transaction,
(ii) recover any profit made by trustee, or
(iii) affirm the transaction.
What is the Trustee's Duty to Earmark Trust Property?
A trustee must keep trust assets physically separate from other assets.
~ Trust property must be titled in the trustee as trustee for a specific trust.
~ If the trustee commingles trust assets with her own and some of the property is lost or destroyed, it is presumed that the property lost was the trustee’s, and the property still on hand belongs to the trust.
~ Also, if a portion of commingled assets increases in value and a portion of the commingled assets decreases in value, it is presumed that it was the trustee’s assets that decreased in value and the trust’s assets that increased in value.
When May a Trustee Delegate Duties?
A Trustee has Duty to Perform Duties Personally, i.e., there is a Prohibition on Delegation of Duties.

A trustee may only delegate acts that would be unreasonable to require her to perform personally; she may never delegate the entire administration of a trust.
How does the Prohibition on Delegation of Duties relate to Investment and Management Decisions?
Traditionally, investment decisions could not be delegated, but under the Uniform Prudent Investor Act (“UPIA”), a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances.
What is the Remedy if a Trustee improperly limits or surrenders her control?
If a trustee improperly limits or surrenders her control, she becomes a guarantor of the fund and is responsible for actual losses, no matter what the cause of the loss.
What is the Trustee's Duty to Defend the Trust?
A trustee owes a duty to defend the trust from legal attack unless examination reveals the challenge is well-founded.
What is the Trustee's Duty to Preserve Trust Property?
The power to invest is normally implied from the duty to make trust property productive.
~ The trustee is expected to take actions to, for example, lease land, collect claims, and invest money.
~ The measure of damages for breach of this duty is the amount of income that would normally accrue from proper investments.
What Governs a Trustee's Investment Responsibilities?
A trustee’s investment responsibilities are governed by either the Uniform Prudent Investor Act (“UPIA”) or statutory “legal lists.”
~ Regardless of the approach used by a state, the trust terms can expand or limit the trustee’s powers—UPIA or legal list provisions apply only if there is no contrary provision in the trust instrument.
~ If the trust instrument provides that investments may be made in the trustee’s discretion, it is a question of interpretation whether the trustee’s power is expanded beyond the UPIA or legal list.
~ Although the investment power may be broadened, such language will be strictly construed.
What is the Standard of Care under the Uniform Prudent Investor Act (UPIA)?
A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets.
~ A trustee with special skills or expertise, or who has represented herself as having such knowledge, has a duty to use such skills or expertise.
What is the UPIA Duty of Loyalty and Impartiality?
A trustee must act exclusively for the beneficiary when investing and managing trust assets.
~ If there is more than one beneficiary, she must act impartially in investing and managing the trust assets.
How is Prudence evaluated under the UPIA?
Investment decisions must be evaluated in the context of the entire trust portfolio (corpus) and as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust.
Under the UPIA, what types of Investments are permitted?
The UPIA permits a trustee to invest in any kind of property or any type of investment provided she acts prudently;
~ no particular type of investment is inherently imprudent.
UPIA - What type of Factors are Considered in Making Investment Decisions?
The following circumstances are relevant and must be considered by the trustee in making investment decisions:
(i) general economic conditions;
(ii) the possible effect of inflation or deflation;
(iii) the expected tax consequences of investment decisions or strategies;
(iv) the role that each investment plays within the overall trust portfolio;
(v) the expected total return from income and appreciation of capital;
(vi) needs for liquidity;
(vii) an asset’s special relationship or value to the purposes of the trust or to one of the beneficiaries; and
(viii) any differing interests of the income beneficiaries and the remaindermen.
UPIA - What is the Rule as to Diversification?
A trustee generally must diversify the investments of the trust unless she reasonably determines that the purposes of the trust are better served without diversification.

~ Compliance with the UPIA is determined in light of the facts and circumstances existing at the time of the trustee’s decision or action.
UPIA - What is the Rule as to the Delegation of Investment and Management Functions?
A trustee may delegate investment and management functions but must act prudently in:
(i) selecting an agent;
(ii) establishing the scope and terms of the delegation; and
(iii) periodically reviewing the agent’s actions.
What are Statutory Legal Lists?
Statutory “legal lists” set forth approved investments for trust assets.
~ If the list is “permissive,” the trustee can invest in securities outside the list.
~ If the list is “mandatory,” the trustee probably commits a breach of trust if she invests in properties outside the list.
~ Under either type of statutory list, the trustee cannot blindly follow the list; she must exercise reasonable care, skill, and caution in investing while taking into account all relevant circumstances.
~ Proper investments include government securities, first mortgages on land with adequate security, and high grade corporate bonds.

~ Unsecured loans and second mortgages are generally improper investments.

~ Most statutory lists exclude common and preferred stocks.

~ Courts are divided on whether investment in land is proper. Unproductive land is not a proper investment.

~ Mortgage participations, common trust funds, and mutual funds are increasingly permitted by statute.

~ A trustee cannot carry on the testator’s business unless expressly authorized by the trust.
Summary of the Fiduciary Obligation.
Standards imposed on the trustee are harsh and designed to deter wrongful conduct and to ease the burden of proving a breach of duty. Ask yourself:
a. Was the act one that the trustee was authorized to perform by the instrument, by state law, or by implication?
b. If the act was proper to perform, did the trustee do so with the appropriate care, skill, and caution?
What are the Remedies of the Beneficiaries for Breach of Duty by the Trustee?
Beneficiaries may seek damages or removal of the trustee for breach of duty.
~ The settlor may sue if he is also a beneficiary, but outsiders cannot enforce the trust.
~ The trustee is liable for losses resulting from breach, lost profits to the trust, and interest on her liability from the time of breach.
~ Prior to actual breach, a court of equity will compel the trustee to perform her duties and enjoin her from committing breach.

~ Equity will not enforce the trust if the beneficiaries consented to or joined in the breach of trust.
~ The beneficiary must sue within a reasonable time or he will be estopped by the doctrine of laches.
~ Mere failure to object at time of breach, however, does not constitute consent.

~ A trustee is not permitted to offset loss from one breach by gain that resulted from another breach.
When will the Trustee be Liable for the Acts of an Agent?
A trustee will be liable for the acts of her agents if she
(i) directs, permits, or acquiesces in the act, conceals the act, or fails to compel the agent to redress his wrong;
(ii) improperly selects or improperly delegates; or
(iii) fails to exercise reasonable supervision over the agent.
When will a Trustee be Liable for the Acts of Co-Trustees?
A trustee will be liable for acts of a co-trustee if she:
(i) approved, acquiesced, or participated in the breach or negligently disregarded her own duties;
(ii) concealed the breach or failed to take steps to compel redress; or
(iii) improperly delegated authority to the co-trustee.
When will a Trustee be Liable for the Acts of a Predecessor Trustee?
A trustee will be liable for a predecessor trustee’s breach if she
(i) knew or should have known of the breach and failed to compel redress, or
(ii) was negligent in determining what property should have been delivered to her.

~ Note that Successor trustees can maintain the same actions as the original trustee.
Under Liabilities of a Trustee - What is Effect of Exculpatory Clauses?
Clauses attempting to relieve a trustee of liability for breach of trust are strictly construed, but are enforceable where no bad faith, intentional breach, or recklessness is involved.
~ Clauses absolving the trustee from all liability, however, are void.
What is a Trustee’s Liability to Third Parties - as it relates to Contracts entered into?
Unless the contract specifically provides otherwise, a trustee is personally liable to third parties on contracts made in the course of trust administration.
~ A trustee is entitled to reimbursement (indemnification) from the trust, however, if the contract was within her powers and she acted with reasonable prudence.
What is a Trustee’s Liability to Third Parties - as it relates to Tort Liability?
A trustee is personally liable for torts committed in the course of the trust administration, including those committed by the trustee’s agents.
~ There is indemnification only if the trustee was not personally at fault or the tort occurred as a normal incident to activity in which the trustee was properly engaged.
~ If the trustee is entitled to indemnification, creditors to whom he is liable can reach trust assets to satisfy claims.
Liability of Third Parties to the Trust - What if Property is Improperly Transferred to a Non-Bona Fide Purchaser?
A beneficiary or successor trustee can set aside transactions that are breaches of trust if the property is not in the hands of a bona fide purchaser (“BFP”).
~ A BFP “cuts off’ the beneficiaries’ equitable interests.
Liability of Third Parties to the Trust - What if Property is Transferred to a BFP?
A third party is a BFP if he acquires the property for value and without notice of the trust.
~ A person who knows of facts requiring an inquiry, which if pursued would have revealed the existence of a trust, is not a BFP.
~ An innocent donee of trust property is not liable for damages but must restore the property, its value, or its substitute to the trust.
Liability of Third Parties to the Trust - What if there is Participation in a Breach of Trust?
A knowing participant in a breach of trust is liable for the resulting loss to the trust estate.
Liability of Third Parties to the Trust - Are Direct suits by Beneficiaries not Permitted ?
Direct suits by beneficiaries are not permitted against third parties who damage trust property; the trustee alone can sue.
~ The beneficiaries’ remedy is to bring suit in equity to compel the trustee to sue the third party.

~ Direct actions by beneficiaries against third parties are permitted where the trustee:
(i) participated in the breach,
(ii) has left the jurisdiction and no successor trustee is appointed, or
(iii) fails to sue a third person liable in tort or contract.
Accounting—Allocation of Receipts and Expenses - How are Dividends on Ordinary Stock Treated?
~ Ordinary cash dividends are income.
~ Extraordinary dividends are principal if paid in stock, and are income if payable in cash.
~ Dividends payable either in cash or stock at the trustee’s option are treated as cash dividends.
Accounting—Allocation of Receipts and Expenses - What are Wasting Assets?
Wasting assets are those that lose value in the income-producing process in a more dramatic fashion than usual (e.g., patent and royalty rights).
~ The trustee has an implied duty to sell such assets within reasonable time to preserve property for the remaindermen.
~ Where the trustee holds wasting assets pending their sale, she has a duty to set aside a portion of receipts to preserve the value of the original investment.
~ Where the settlor has authorized the trustee to hold wasting assets, all receipts therefrom are income.
Accounting—Allocation of Receipts and Expenses - What is the Open Mines Doctrine?
The open mines doctrine allocates receipts to income or principal depending upon when the mine is opened.
~ If new mines are opened after the trust is created, receipts are treated as principal.
~ If the mine is opened prior to creation of the trust, receipts are treated as income.
Accounting—Allocation of Receipts and Expenses - What is the Rule as to Unproductive or Underproductive Property?
A trustee generally has an implied duty to sell unproductive or underproductive property. Where the trustee holds such property pending sale, a portion of the sales price is allocated to income. Where the settlor authorizes the trustee to hold such property, all receipts on sale are principal.
Accounting—Allocation of Receipts and Expenses - What are Expenses Charged to?
~ Day-to-day trust operating expenses are charged to income (e.g., recurring taxes, interest payments, sums expended to produce income).
~ Expenses to preserve the corpus and extraordinary expenses are charged to principal (e.g., special assessment taxes, repayment of a loan, sums spent that primarily benefit the remaindermen).

Mortage Payments: Interest on mortgage debt is chargeable to income; principal payments are chargeable to principal.

Repairs and Maintenance: Current expenses for repairs and maintenance and insurance premiums are charged to income.

Improvements by Trustee: Improvements likely to depreciate in value are chargeable to principal, but amortized out of income over their expected life.

Trustee’s Compensation and Legal Fees: The trustee’s fee and routine legal fees are apportioned between income and principal. Legal fees in establishing a trust are paid out of principal.
Will Substitutes - In General:
If a person wants to transfer property at the moment of death, she must comply with formal requirements of making a will.
~ However, a settlor may make certain inter vivos (lifetime) transfers without the formalities of a will.
What is the test for distinguishing a trust from a will?
The test for distinguishing a trust from a will is whether the transfer creates some present gift, even if that gift is of a future interest subject to divestment (i.e., revocable trust is valid since interest passes to the beneficiary during the settlor’s lifetime; it merely becomes possessory on the settlor’s death).
Determining Whether Interest Passes - May the Settlor Retain Powers Over the Trust Property?
The tendency is to uphold trusts even where the settlor has retained great rights and powers over the trust property.
~ If the settlor retains a life estate and the power to revoke, the trust is generally upheld.
Determining Whether Interest Passes - May the Settlor Retain Powers Over the Trust Property if the Settlor is the Trustee?
Even if the settlor is the trustee, as well as the life tenant with power to revoke, most courts uphold the trust where the settlor notified third parties or took some action that made his intention to establish a trust clear.
What are the Advantages of a Revocable Trust?
A revocable trust may be used for convenient management of assets, to plan for the possibility of incapacity, to avoid probate costs and delays, to permit secrecy as to beneficiaries and assets, and to allow the settlor to choose the applicable state law.
~ Also, in some states a revocable trust can defeat the spouse’s forced share.
~ But many states deem a revocable trust to be illusory, so that a surviving spouse can reach the trust’s assets and set aside the transfer to the extent of his or her forced share. [CA]
What is a Pour-Over Gift from Will to Revocable Trust?
Under the Uniform Testamentary Additions to Trusts Act, a settlor can make gifts by will to a trust—even an amendable and revocable trust—established during her lifetime.
~ The trust must have been established before or at the same time as the will, and may remain unfunded during the settlor’s lifetime. The trust must be clearly identified from language in the will.
As a Will Substitute, are Life Insurance Trusts Upheld?
Despite the absence of a significant res prior to the settlor’s death, inter vivos life insurance trusts are upheld.
What is a Totten Trust Account?
In a Totten trust, a bank account depositor declares herself trustee of the account for a person who is to receive the money in the account at the time of the depositor’s death.
~ The depositor retains full control of the money in the account during her lifetime. These accounts are not really trusts because they do not separate legal and equitable title, nor do they meet the formal requirements of wills.
~ A Totten trust is revocable by
(i) the withdrawal of funds,
(ii) any lifetime act manifesting the intent to revoke, and
(iii) unlike joint accounts, a specific contradictory provision in a will.
~ It does not protect funds in the account from creditors’ claims, and it terminates if the beneficiary predeceases the depositor.
Under Will Substitutes - What is the Uniform Transfers to Minors Act (“UTMA”)?
The UTMA provides a convenient procedure for making gifts to minors who have no legal capacity to manage or sell property, under which property may be transferred to a person as custodian for a minor. A custodianship is not a trust. The custodian does not hold legal title to the custodial property; legal title is in the minor, subject to the custodian’s statutory power.
The custodian is a fiduciary subject to the standard of care of a prudent person dealing with property of another. A custodial gift made pursuant to the Uniform Act qualifies for the $10,000 per donee annual federal gift tax exclusion.
In General - what are Constructive and Resulting Trusts?
Resulting and constructive trusts are trusts implied by law or imposed by courts.
~ Resulting trusts involve reversionary interests and are based on the presumed intent of the settlor.
~ Constructive trusts are used to prevent unjust enrichment.
~ They arise either where there is no valid express declaration of trust or, frequently, when no trust was even intended.
~ The Statute of Frauds is inapplicable.
In General, what are Resulting Trusts?
Resulting trusts involve reversionary interests and are based on the presumed intent of the settlor.
In General, what are Constructive Trusts used for?
Constructive trusts are used to prevent unjust enrichment.
When will Resulting Trusts be Implied?
Resulting trusts are of three types:
(i) purchase money resulting trusts,
(ii) resulting trusts arising on failure of an express trust, and
(iii) resulting trusts arising from an incomplete disposition of trust assets (i.e., excess corpus).

~ Pro Rata Resulting Trusts: Where X supplies only part of the consideration, the resulting trust in his favor is only for a pro rata portion of the property.
When is a Purchase Money Resulting Trust Presumed?
A purchase money resulting trust is presumed whenever X (the “beneficiary”) furnishes the consideration (usually money but any other valuable consideration suffices) for the acquisition of real or personal property but, with X’s consent, title is taken in the name of Y (the “trustee”).

The consideration paid by X must be for purchase of the property.

~ Sums paid by X to make improvements on the property or to pay taxes on it do not give rise to a trust.

~ The consideration (or obligation to pay) must be supplied at or before the time Y takes title.

~ The burden is on X, the party claiming to be the beneficiary of a resulting trust, to prove by clear and convincing evidence that he supplied the consideration.

~ Once X proves he supplied the consideration, a resulting trust is presumed; but Y can rebut by showing no trust was intended (e.g., payment was a gift or loan to Y or satisfaction of a debt owing to Y). Recitals as to who paid consideration are not conclusive.
In a Resulting Trust situation, What is the Presumption Where the Parties are Closely Related?
Where there is a close personal relationship between the parties (e.g., X, the party paying consideration, is the parent, grandparent, or husband of Y), a gift is presumed rather than a trust.
~ This presumption is also rebuttable. Where X is the wife of Y, there is a split of authority as to whether a gift or trust is presumed. The normal presumption of a trust applies where the person furnishing consideration is the uncle, aunt, brother, sister, child, or grandchild of the person receiving title.
In a Resulting Trust situation, What is the Presumption Where there is an Unlawful Purpose?
If X and Y take title for an illegal purpose, a trust cannot be implied, although recent cases suggest that the implied trust is still proper where X’s misconduct is slight compared to the unjust enrichment Y will enjoy if permitted to keep the property.
In a Resulting Trust situation, what result if a Transferee Obtained Title Wrongfully?
No resulting trust arises when the transferee obtained title wrongfully (e.g., fraud), although a constructive trust may be imposed.
Circumstances Giving Rise to Resulting Trust on the Failure of an Express Trust?
A resulting trust arises where a settlor has conveyed property to a trustee under an express trust and:
(i) the trust is void or unenforceable or
(ii) the beneficiary is dead or cannot be located.
A resulting trust may also apply on failure of a charitable trust where cy pres is inapplicable.
~ In such event, the express trust terminates and the settlor becomes the beneficiary of the resulting trust.

A resulting trust will not be implied where:
(i) the trust instrument specifically or implicitly provides for disposition of trust property when the trust has failed or been completed,
(ii) the settlor was given consideration for his original transfer in trust,
(iii) the settlor created the trust for an illegal purpose, or
(iv) cy pres is applicable in cases of charitable trusts.
What if the trust purpose is fully satisfied and some trust property remains?
A resulting trust in favor of the settlor also arises when the trust purpose is fully satisfied and some trust property remains. There could be a resulting trust of part of the corpus even before the trust is terminated if it is clear that there is excess trust corpus.
What is a Constructive Trust - When will a Constructive Trust Be Implied?
A constructive trust is not really a trust but rather is a flexible equitable remedy to prevent unjust enrichment resulting from wrongful conduct, such as fraud, undue influence, or breach of a fiduciary duty.
~ The constructive trustee’s only duty is to convey the property to the person who would have owned it but for the wrongful conduct.
~ Proof of the facts necessary to establish a constructive trust must be made by clear and convincing evidence.
What is a Constructive Trust Arising from Theft or Conversion?
If Y steals property from X, title remains in X; there is no need to imply a trust.
~ But if Y uses the property to acquire other items, he takes title to the items and holds them in constructive trust for X.
What is Constructive Trust Arising from Fraud, Duress, Etc.?
Where Y acquires property from X by fraud, duress, mistake of fact, or by breach of a fiduciary duty owed to X, Y holds the property in constructive trust for X’s benefit.
~ If property is conveyed to a third party who is not a BFP, the third party can be declared a constructive trustee.
~ If Y takes property under a forged or fraudulent will, he holds it in constructive trust for its rightful inheritor; this is true even if Y is innocent.
What is a Constructive Trust Arising from Breach of Fiduciary Duty?
The fiduciary’s duty forbids him from taking title to property belonging to a beneficiary and from seizing for himself an opportunity to acquire property that comes to him in his capacity as fiduciary.
~ If he violates this fiduciary duty, courts may impose a constructive trust in favor of the person to whom he owes the duty.
What is a Constructive Trust Arising from Homicide situation?
If Y kills X and is convicted of murder or manslaughter, he holds any property acquired from X by will or intestacy as constructive trustee in favor of whomever would have taken the property had Y predeceased X.
What about Where the Victim and Killer Held Property in Joint Tenancy?
Where X and Y were joint tenants, the killer Y may be trustee of only a one-half interest and own the balance free of trust, or he may hold the whole interest in constructive trust less his life estate in one-half (depending on the jurisdiction).
What is the Rule as to Constructive Trust Arising from a Breach of Promise?
The general rule is that a mere breach of a promise will not raise a constructive trust.
~ Thus, where A transfers real property to B on B’s oral promise to hold it for C, only a few jurisdictions will imply a trust for C. The majority considers the Statute of Frauds a bar.

~ The burden of proof is on the party seeking constructive trust to establish facts relied upon by clear and convincing evidence.
What are Exceptions to the General Rule that a Constructive Trust will not be imposed for the Breach of a Promise?
A constructive trust will be imposed in the following cases:

1) Fraudulent promise (promisor never intended to keep it);
2) Breach of promise by one in a confidential relationship;
3) Breach of promise by devisee or heir to decedent to hold property for the benefit of a third person;
4) Breach of promise by decedent to devise property to one rendering services in reliance thereon (but no constructive trust here if damages are an adequate remdy); or
5) Breach of promise to debtor by buyer at foreclosure sale to hold the property for the debtor causing debtor to forgo bidding at the sale (but in many jurisdictions no constructive trust if damages adequate).
What are the Obligations of a Trustee of a Constructive OR Resulting Trust?
Constructive and resulting trusts are passive trusts.
~ Once the court has declared such a trust to exist, the trustee’s sole duty is to convey legal title to the beneficiary.
~ The trustee must also account for profits taken from the property or fair rental value of his use of it from the time of the occurrences raising the implied trust.
~ There is no duty on the trustee to invest trust property.
Application of Equitable Principles:
Actions to impress constructive or resulting trusts are in equity, and most equitable principles are fully applicable (e.g., the “unclean hands” doctrine, and the rule that one seeking equity must “do equity”—such as requiring the beneficiary to reimburse the trustee for sums expended in good faith to improve the property, pay taxes on it, etc.).
~ However, the rule that an “adequate remedy at law” bars equitable relief is not applicable—except to the breach of an oral promise to make a will, or to hold property purchased at a foreclosure sale for the benefit of the promisee.